This piece focuses on the $35 billion question – how to pay for it. Next up: wrapping it up with the strategy for getting it done.

If transit today is underfunded, how can we expect major improvements out of our agencies? The answer is, we can’t. That’s not to say that the CTA can’t and shouldn’t improve. It should, and I’d argue it has in the recent past. But we’re not going to change the game, to go from good to great, without a lot more money. So, where can we get it?

Can We Afford It?

This section is new for this version of the post. The first question perhaps is can we afford it at all. I think transit advocates and urbanists generally need to face reality that starting up a major new program at this time is a non-starter. States and localities are broke, particularly in Illinois. The job market continues to be terrible. And the public is in no mood to spend. Don’t fight the tape, people.

So before we can even think about pulling the trigger on implementing something, we need a clear change in macro-economic fortunes nationally and locally, and we need to both resolve the long term structural issues with the budgets both in Illinois and in the city of Chicago. (To put this in perspective, see “Illinois is Broke” and “Broken Budget Awaits the Next Mayor“). I wouldn’t count on much help from the feds given the recent election and the previous botched stimulus.

Speaking of the stimulus, the reality is that a program to renew Chicago’s transit infrastructure for future generations is not a “shovel-ready” project. There is a lot of planning and organizing work to do to get ready to make the pitch for money to actually do something. That work can proceed now while these other things are resolved. (If they don’t clear up in at least the next 2-3 years, we’ve got bigger problems than transit, anyway).

Also, this notion that somehow if we simply don’t spend any cash, that we’re not spending money and are showing fiscal discipline is a mirage created by the completely bogus practice known as “government accounting.” That fantasyland is a world run on cash only. There’s a reason real businesses don’t use cash accounting. It’s nothing but a gimmick. Yes, cash matters. But just because you aren’t spending cash on something doesn’t mean you aren’t incurring an expense. For example, New Jersey Governor Chris Christie is balancing his budget “without raising taxes” by, among other things, zeroing out the state’s pension contribution. But the pension liability was incurred regardless. It’s only a question of whether you fund it or kick the can down the road. Most governments have elected to kick the can, which is why so many of them are now broke. That’s not fiscal conservatism, it’s budgetary flim-flam.

Chicago is going to pay a price for its transit system, one way or another. There’s no escape from that.

Lastly, the “Mitch Daniels solution” is simply not going to work in Chicago. That is, this is not a city that can become prosperous merely by squeezing spending because it will always be cost disadvantaged versus most of the rest of the country. And the ultra high end services on which it is betting its future depend on quality of services more than minimum costs. Of course we need to manage costs aggressively, but Chicago is also going to have to choose to do some things. The “Do as little as possible” approach simply won’t work here. Transit may not be the right task to take on, but you’ve got to take on something.

Financial Facts

First, let’s start with the fact that the CTA does not control any material funding lever except fares, which are already high. The remainder of the CTA’s money, save for some minor advertising income and the like, comes from a mixture of federal capital aid, and taxes whose rate is set by state law. So any change in the funding situation will require legislative action.

Second, the CTA, Metra, and Pace are required by law to achieve 50% farebox recovery. This might not sound like much, but is much higher than most transit systems. Portland, for example, only has about 20% farebox recovery. While the CTA, as a big city system, might be expected to be higher, 50% is probably still too high. Incidentally, only a tiny handful of transit systems in the entire world that break even or turn a profit.

Third, the CTA is burdened with innumerable unfunded mandates from the state and federal government, including free rides for seniors and other discounts.

Fourth, the CTA is caught in a big pension vice. Its pension system was vastly underfunded, until it borrowed money to top it off – with repayments that comes right off the top out of the operating budget. The Illinois constitution prohibits the impairment of any pension benefit already earned.

A Fixed Cost System vs. Variable Revenues

A transit system is more or less a fixed cost system to operate once you decide on service levels. That is, the CTA decides how much seat capacity to put on the street and rail lines, and the cost to operate it is more or less fixed regardless of how many people actually ride.

However, the CTA’s tax revenues come from two principle sources: sales taxes and real estate transfer taxes. Both of these are highly cyclical. And where we are in the cycle, those revenue streams have declined massively, putting huge holes in transit budgets across America. The fact that the CTA is so dependent on fares is actually a plus right now, since fare revenue is fairly short term stable, at least in contrast to other revenue streams.

If you are going to fund a fixed cost system with variable revenues, you had better have a healthy reserve account for a rainy day. Chicago’s regional transit systems do not, which is why there are repeated “Doomsdays” as revenues decline.

You Have to Pay For It Yourself

So where is the money going to come from to improve and operate Chicago’s transit system? At the end of the day, Chicagoans are going to have to use their own money to do so.

I find it interesting that most local transit advocacy focuses on getting more money from Washington and Springfield. While a Chicago-heavy White House with Democratic control of Congress [update: no longer] might enable something to happen there, I’m not holding my breath.

Consider that there are only a handful of cities with older systems like the CTA that need upgrading. That right there creates a numbers game problem, particularly in the Senate. Likewise, historically Springfield has done little to help. Even the recent $25 billion state capital plan included a comparatively small amount for transit.

Most importantly, other cities around the country are paying for their own transit. In city after see we see transit levies placed on the ballot to raise funds to construct and operate new light rail lines and other systems. Last November, for example, the Seattle area voted to raise its own taxes in order to collect $30 billion over the life of the tax for transit improvements. This is in an area only about a third the size of Chicago.

This also creates problems in Congress. If every other city is voting to raise taxes to invest major local dollars into transit capital, why should Chicago get a pass? Also, this goes right along with the heritage of the Burnham Plan. Chicagoans voted dozens of times to allow bond issues to finance the major public works programs coming out of that plan.

The answer to me is pretty clear. To really change the transit game in Chicago means putting a tax on the ballot for the people to put up or shut up on whether they actually want a better transit system.

Parameters of the Financing

Before getting to the specific measures, I’d like to propose some basic things to use the money for.

First, I’m assuming there is that compelling vision from part one to get people to buy into the system. This probably has a mix of near term and long term items, tangible and conceptual items. That means there is probably a phasing that needs to be figured out. I would suggest that it would be a limited number of phases, with a pretty beefy first phase. If asking citizens to vote on a tax increase, they should get something pretty big and visible out of it. Also, you don’t want to go back to the well too many times. On the other hand, you can’t expect people to buy a pig in a poke either, so it probably can’t be everything in one vote.

With that backdrop, I would suggest the a ballot to raise taxes with the proceeds to be used for:

Establishing a CTA operating reserve of $500 million, with parameters to make sure it isn’t rapidly drained and never replenished. Metra and Pace need reserves as well, though potentially we’ve reorganized our governance at this point, remember?

Funding debt service on a bond for a fairly healthy first phase of work. I would suggest something in the neighborhood of $15-20 billion. Potentially the actual program could be bigger when combined with federal assistance or other revenue sources such as existing TIF’s.

Sources of Funds

Typically, transit bonds are backed by increases in the sales tax. However, given the sale tax dependency of Chicago transit today, and the high Chicago sales tax rate and associated political drama around the Cook County tax, this may not be realistic. Where then could the city look? Here are some ideas:

Land Value Tax. A land value tax is a tax not on dirt, but on a physical site. This does not include any improvements made to the site, such as buildings. This is an attractive form of taxation for a few reasons. Firstly, it doesn’t distort production. If you tax something, you get less of it, but since the surface of the earth is already fixed in extent, this isn’t a problem here. The marginal supply of new sites is zero no matter what. Also, it encourages people to put land to good use. Today, if someone builds a skyscraper downtown, their “reward” is a huge tax bill. But if someone tears down a historic building and puts in a surface lot, his taxes go down. That makes no sense. A LVT discourages land banking and speculation, and encourages people to invest in their property. And, the value of a site is really not a function of what any individual person does. Rather, it is a result of overall community growth and investment. This is in contrast to the value of a building, which is principally a result of what the owner does. Consider the value of the Chicago Loop. Now consider the value of the Chicago Loop without transit. The enormous site values in the Loop were created by transit, so why not capture for transit the value created by it? I can’t do this topic full justice here, but suffice to say there are many reasons why, if you have to have a tax, a land value tax is the best way to go. Its principal downsides are a lack of familiarity and a lack of experience in implementation, which would doubtless result in some bumps.

Congestion Charges/Tolling. This would involve something along the lines of converting the freeways in the city into tollways, using the proceeds to fund road maintenance and operations, and also transit. It could also be used for congestion management purposes. This would require federal rule changes and no doubt much political difficulty. I do not believe a London style congestion charge around the Greater Loop area is feasible or desirable.

Automobile surcharges. This could include items such as additional registration fees or parking taxes.

Income taxes. Illinois income tax rate at 3% is not that high on a comparative basis. It remains to be seen where it will be after the legislature finishes addressing budget deficits, but this is one possible source of funding as well. It seems likely to me the income tax is heading higher, but even at a base of 4-5% it would still be lower than competing jurisdictions like California and New York.

I would suggest that a land value tax and congestion charges are the best approaches, but that the income tax based approach is probably the most straightforward and easiest to implement. I don’t have the time right now to do the math, but it should be fairly straightforward to calculate the supplemental rate needed to raise the types of funds outlined above.

Chicagoans may not go for this, but I do not see any other realistic alternative to raising major funds other than local dollars. Fundamentally, if Portland, Seattle, San Francisco, Dallas, Denver, Charlotte and many more places can do it, I don’t see why a truly world class city like Chicago can’t step up to the plate and do what needs to be done, particularly when the need is evident and when you have that vision in place and the other elements needed to convince the public.

I agree that the LVT should be first on the list of financing options. It might not support the entire cost but it is a wonderful way for transit to capture some of the value it creates, and it puts more of the burden on those who directly benefit. Here in Indianapolis (and probably elsewhere) it is hard to generate support for paying transit-oriented taxes in parts of town that will see little direct benefit from the system. But the same folks probably wouldn’t have a lot of energy against a financing scheme that didn’t tax them for a system they’ll rarely (if ever) use.

Given the labor situation in Illinois, I have trouble seeing privatization. However, there’s no reason bus operations can’t be contracted out. There are plenty of successful examples of this around the world. Madrid and Seoul did PPP’s on major construction contracts. I believe there are even some privatized rail operations in places like Hong Kong and Tokyo, but the environments there are very different from Chicago.

I like the idea of parking taxes – I envision a tax on private parking lots and private parking garages. I haven’t seen any real proposals on something like that (not that I have looked hard) but I envision a price-per-slot tax. This would I believe curb sprawl and the size of under-utilized parking lots (think any Kmart lot). It would also encourage the utlization of transit since parking costs would increase and supply would decrease. Perhaps, in acknowledgement of the need for some parking and the desire for denser downtowns and communities, the tax would be a certain amount for a flat lot or the first level of a garage, and gradually reduced. This would also reduce the incentive to put in a surface lot that plagues many midwest city centers.

Madrid does infrastructure design in-house. It’s part of the strategy to reduce cost.

Seoul did one line as a PPP, but the operation is private and expected to turn a profit; this limits the private contractor’s ability to squeeze subsidies out of the public. Many other lines are done entirely publicly.

…Again comparing Chicago to cities in nations which heavily invest in their cities. Here in the US of A, we let our cities rot and we’re proud of it!

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About the Urbanophile

Aaron M. Renn is an opinion-leading urban analyst, consultant, speaker, and writer on a mission to help America’s cities thrive and find sustainable success in the 21st century.